Dutch Regulator Plans Restrictions on Turbo Certificates

The Netherlands Authority for the Financial Markets (AFM) has initiated a public consultation on Wednesday on its proposal of imposing restrictions on the retail sale of Turbo certificates, a widely used investment instrument in some European markets.

According to the Dutch regulator, retail investors are now insufficiently protected against the risks of such derivative products and is considering to limit their marketing, distribution and sales.

Turbo certificates are similar to contract for differences (CFDs) in many aspects: both are leveraged investment products. However, turbos have a built-in stop loss, and positions are automatically closed once a predetermined price level is reached.

While CFDs closely resemble futures, turbo certificates are closer to options where loss is effectively restricted.

Though turbo certificates are not as popular as CFDs, they have a significant reach in Dutch, German, Belgian and Austrian markets.

According to a regulatory survey, 68 percent of the retail turbo investors lose their money with an average loss of €2,680.

The Dutch AFM has already restricted the sale of CFDs last year, complying with the tightened European Securities and Markets Authority (ESMA) regulations. Now it is proposing some of those restrictions to the turbo certificate market. Notably, the market watchdog also imposed a ban on binary options citing risks and frauds.

The regulator is proposing to impose three restrictions on turbo certificates: putting a limit on leverage, showing mandatory trading risk warnings and a ban on trading bonuses.

Before this latest public consultation, the Dutch regulator consulted with the turbo industry players, seeing their input on the type of restrictions they want. However, that did not result in any conclusion as the industry feedback ranged from an outright ban on turbos to doing nothing.

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